Annuitant Definition + Annuitant vs Annuity Owner

Often annuity articles refer to the annuity owner and the annuitant as the same person, but that's not always the case. So it's essential to understand the difference between the two. The annuity owner is the person who completes the annuity application and provides the initial deposit.

The annuitant is the person designated by the owner who receives the annuity payouts. More often than not, the annuity owner and the annuitant are the same person, but they don't have to be.

Keep reading to learn the difference between annuitants and annuity owners and how the two differ from beneficiaries.

Who Is the Annuity Owner?

The roles in an annuity purchase are actually pretty straightforward. The annuity owner is the person who signs the annuity contract.

They decide on the contract's terms, including the annuity payout dates, who will receive the payouts, and how the payouts will be distributed. They are the person who funds the annuity by making the initial deposit.

The owner also identifies the annuity's beneficiary and decides on death benefits. They have the sole authority to do things like make withdrawals, change beneficiaries, and cancel the contract.

What Is Joint Ownership?

It is possible for two people to jointly own an annuity.

But because of tax code changes that occurred way back in 1986, there are no longer tax advantages to joint ownership. Joint ownership can complicate the administration of the contract, especially after the death of one of the owners. Naming a spouse or child as a beneficiary is usually a better method for passing along the balance of an annuity after the death of the owner.

One scenario where it may be beneficial to have joint ownership is for Medicaid planning purposes.

For example, if either of the co-owners of an annuity enters a nursing home, the other could annuitize the contract.

Because each individual's circumstances are different, buyers should consult with their investment, tax and legal advisers before purchasing an annuity.

Who Is the Annuitant?

The annuitant is the person who will receive the annuity payouts.

The life insurance company uses factors from the annuitant's life to determine the payout schedule.

This is also known to insurers as "measuring life." Critical determining factors include the annuitant's gender, age, and life expectancy. The annuitant does not have the authority to make any changes to the contract—only the owner can do that. They also cannot access the money until the date stipulated in the contract.

If you're thinking about purchasing an annuity and want to name someone else as the annuitant, consider someone younger than you.

Younger annuitants can typically enjoy income benefits and tax-deferred growth for a longer period of time.

Can There Be Multiple Annuitants?

Annuity carriers allow there to be multiple annuitants identified when purchasing an annuity. As mentioned earlier, an annuitant is a person whose age and life expectancy affect the size of the monthly payments. When an annuity owner names two annuitants, they are commonly known as joint annuitants.

If you're married, this may be a good option for you and your spouse. Here's some information on what's involved when you name or become a joint annuitant.

A common type of annuity with joint annuitants is called a joint and survivor annuity. This annuity is usually purchased by married couples and can provide income for two people, with payment based on the lives of both the owner and spouse, who is the joint annuitant.

As you might expect, annuity payments that continue for the duration of two lives are going to be less than those that are for a single life. The IRS has rules for joint and survivor annuities that are part of certain tax-qualified retirement plans.

Under IRS rules, when the annuitant dies, payments continue on to the joint annuitant and must be no more than 100% and no less than 50% of the joint annuity's original payment amount.

If you're deciding whether you and your spouse (or someone else) should become joint annuitants, there are some questions to consider:

• What payment amount is needed for both annuitants to support their lifestyle and expenses?
• Are there other assets, like a life insurance policy, where the joint annuitant is identified as the beneficiary?
• How much would the joint annuity payment be reduced after the death of a joint?

Annuitant Vs. Beneficiary

Similar to life insurance, annuities pay out a death benefit when the owner or annuitant dies.

Whether it pays out when the owner dies or when the annuitant dies depends on the type of annuity purchased, which we discuss further below. As we mentioned above, the annuity owner and the annuitant can be the same person.

Beneficiaries, however, must be a separate person from the annuitant. They make up the third designation of an annuity contract.

The beneficiary is the individual who inherits the annuity and receives the payout should the owner die.

How the beneficiary receives the death benefit depends on whether the beneficiary is the owner's spouse or not. If the owner names their spouse as the beneficiary, then the surviving spouse can take over the annuity as its owner.

This is known as spousal continuation or a "survivor annuity." If the owner was also the annuitant, then the surviving spouse can continue to receive periodic payments and defer income tax.

Non-spouse beneficiaries are a bit different. Payout options for non-spouse beneficiaries include:

• Taking a lump-sum payment
• Collecting the value of the annuity within five years of the owner’s death (Five-Year Rule)
• Annuitizing the proceeds (setting up monthly payments)
• Taking an annual required distribution based on life expectancy

It is important to understand the additional rules for distribution, depending on whether it's a qualified or non-qualified annuity. For non-qualified annuities, The SECURE Act only allows the beneficiary who is not a spouse to take distributions based on life expectancy.

Qualified annuities are different. This product requires non-spouse beneficiaries to withdraw the entire cash value within ten years of the death of the annuitant.

For example, let's say your Aunt Tilly bought a single-life annuity and named herself the annuitant. She named you as the only beneficiary. She died with $102,000 of cash value left in the account. Because you are a non-spouse beneficiary, you can choose a payout option from the ones listed above. You can collect the $102,000 in a series of regular payments or take the money in intervals of your choice. You can receive it in a lump sum or within five years of Tilly's death. The choice is yours!

The SECURE Act adjusts the rules slightly by category of beneficiary. It recognizes three distinct groups of beneficiaries:

• Non-Designated (i.e., non-person entities such as trusts and charities)
• Eligible Designated (i.e., individuals who are spouses of account holders, those who have a disability or chronic illness, those not more than 10 years younger than the decedent, minor children of decedents, or “See-Through” trusts)
• Non-Eligible Designated (i.e., any individual who qualifies as a Designated Beneficiary but is not an Eligible Designated Beneficiary).

These categories are important because Non-Designated Beneficiaries and those who The SECURE Act identifies as Eligible Designated Beneficiaries are generally subject to the prior rules, namely either the 5-year rule or stretching over life expectancy.

It is the Non-Eligible Designated Beneficiaries that are now subject to the new 10-Year Rule.

Owner-Driven Annuity Vs. Annuitant-Driven Annuity

Setting up the annuity and identifying all parties is essential. The three designations mentioned above (the owner, annuitant, and beneficiary) are paramount to define during the application process. Additionally, an annuity contract will specify whether the annuity is owner-driven (OD) or annuitant-driven (AD). This designation informs the death benefit payout.

• Owner Driven (OD): The annuity owner enjoys all legal rights and can identify and change the designated annuitant to a new annuitant at any time without tax or other penalties. If the owner of an owner-driven annuity dies, the annuitant receives a defined death benefit. This can be paid out in the form of lifetime income or a single payment. If the annuitant in an owner-driven contract dies, the owner can become the annuitant and use the income or can also name a new annuitant and the contract continues.
• Annuitant Driven (AD): With an annuitant-driven contract, upon the death of the owner, the annuitant receives the value of the annuity. How much that amount is will vary, depending on how long the contract was in place and whether it has grown in value. When the annuitant dies, the beneficiary receives the death benefit. Depending on how the annuity was structured, the owner of the contract might receive any remaining guaranteed payments or the contract might end.

Keep in mind that the contract owner can always change the beneficiary, regardless of whether the contract is OD or AD. Death benefits and distribution of money after death is essential. That's why it is critical to understand the differences among these beneficiary designations.

Ensure that your agent or advisor takes the time to explain these differences and creates the simplest type of contract based on your unique life situation.

Structure Your Annuity Contract Correctly

Properly setting up your annuity contract is crucial. As an owner of an annuity, you must structure it exactly how you want it, with the correct annuitant(s) and beneficiary.

A financial professional should be able to help you structure your annuity contract. Their knowledge, transparency, and expertise are vital, especially when it comes to beneficiaries and annuitants. If you're ready to purchase an annuity, check out Canvas Annuity's products. With multi-year guaranteed fixed annuities, they can help you start saving for retirement today!

They have deferred annuities to help retirees as well as those saving for retirement. Plus, their agents are non-commissioned, meaning they provide some of the highest rates around! Check them out today and see how much your money can earn!

Citations

1. AnnuityAdvisors, (League, 2020), Avoiding Disasters in Contract Structuring
2. SmartAsset, (Lake 2020), How to Avoid Paying Taxes on an Inherited Annuity
3. The Nest, (Decker 2020), Annuitant vs Owner
4. ThinkAdvisor, (Lofton 2013), Annuitant-driven vs Owner-driven Annuity Contracts -- Which is Better?